National Taxpayers Union President Pete Sepp says new rules designed to stop American companies from setting up shop on foreign soil may work to keep some firms in the U.S. but he says the only thing that is going to allow businesses to stay and thrive is a tax code overhaul featuring lower rates and a much simpler code.
On Tuesday, President Obama announced the Treasury Department is implementing new rules designed to make it more painful for American firms to purchase a smaller, foreign business and use it as an offshore hub to avoid American taxes. It’s a concept known as an inversion.
While watching American corporations avoid paying U.S. taxes is infuriating to many, Sepp says there are bigger problems.
“President Obama calls this practice ‘insidious’ but what’s really insidious is our failure to keep up with the rest of the world in terms of reforming our business tax systems. We have not had major tax reform in this country for individuals or businesses since 1986,” said Sepp.
Among the new Treasury Department rules are a policy putting a three-year limit on companies outside the U.S. adding American assets so as not to dodge ownership requirements for future inversions. Treasury is also planning to put a stop to earnings stripping after inversions.
Some experts believe the new policies had an instant impact as Pfizer and Irish drugmaker Allergan walked away from their $160 billion merger. Whether that’s the main reason or not, Sepp says a few new policies don’t solve the larger problems.
“Ultimately, it won’t effect the problem a great deal because the problem is rooted in other parts of our tax system: High rates, twice as high as many of our economic competitors. High effective rates, whereby even after deductions and credits, the tax burdens are too heavy for our companies to bear,” said Sepp, who then listed even more problems.
“Shareholders demand that companies limit their tax liabilities and maximize returns. Other countries are not standing in place. They are reforming their tax systems constantly,” said Sepp, nothing that Canada and the United Kingdom have been aggressively cutting rates and rooting out tax code complexities.
The bottom line, says Sepp, is nothing can replace what needs to be done.
“Whatever minor rule makings that the United States Treasury issues, or even laws Congress might make to create new clampdowns on inversions are no substitute for doing the heavy lifting of comprehensive tax reform,” said Sepp.
The problems are clear. Sepp says our rates are simply not competitive, noting our corporate tax rates are north of 39 percent while the average of OECD nations stand near 25 percent. He says Canada’s rate is now around 15 percent.
On top of that, the U.S. also imposes the highly unusual worldwide tax, meaning American firms pay taxes to the U.S. Treasury on profits earned in other nations. Most other nations require companies only to pay taxes where the money was made.
On the complexity front, Sepp says the situation is borderline hopeless. He says businesses spend six billion hours poring over the tax laws to make sure they are in compliance. By the time they are done, the time and cost for properly filing taxes amounts to firms spending an additional $960 per employee. And that’s before the the actual tax payments are made.
Sepp says he wants to hear more specifics from all presidential candidates. As for the Republican hopefuls, he says each have their strong and weak points.
He says Donald Trump has perhaps the most aggressive plan.
“Trump’s tax plan, both for individuals and businesses is very ambitious in terms of the amount of tax relief it would grant. But Trump’s system would preserve many of the inequities in the current tax code and would target a few industries, for example, in finance with higher tax rates. That’s probably the opposite direction we want to take,” said Sepp.
He also sees Ted Cruz as a mixed bag.
“Cruz has proposed a flat-rate income tax for individuals and something like a value added tax for companies. That’s raised a different type of concern as to whether we could control a system like that and prevent the rate from becoming terribly punitive, the way it has in many European countries,” said Sepp.
Sepp describes John Kasich’s plan as a hybrid, offering fewer tax rates and more simplicity. He says both Hillary Clinton and Bernie Sanders would impose “terribly punitive” tax penalties on businesses. But he says everyone needs to get more specific.
“It’s one thing to say you will lower rates. It’s another thing to say how you’re going to make the process of filing taxes easier for businesses. And that’s on the minds of business owners large and small,” said Sepp.
